John S. Herold Inc. cites industry employment problems

Offshore staff

In the face of record oil and gas prices, strong drilling activity, and the largest cash flow in petroleum industry history, employment by the largest US oil and gas companies declined 4.1% in 2004, the 20th annual decline in the past 23 years, according to an analysis released today by energy research firm John S. Herold Inc.

Among the top 25 companies (and their successors) that Herold has tracked since 1974, almost 120,000 positions have been eliminated since 1999. In 2004, employee headcount among the firms fell by more than 21,000 jobs to just over 514,000. Since the 1981 oil price peak, the giant oil companies have shed more than 1.11 million employees, according to the Herold analysis.

"The oil industry faces a Herculean task in overcoming its reputation for brutal treatment of professionals during the past two decades of downsizing," said Arthur L Smith, Herold chairman and CEO. "Our finding suggests that unless oil and gas companies take drastic steps to reverse the brain drain of the energy industry, a severe personnel crunch is preordained. Faced with unrelenting pressure to replace production and find and develop petroleum reserves in both the remote regions of the world and in mature US basins, we wonder if the industry has the luxury of time to recover from its mistakes of the past," Smith said.

The Herold report took issue with the US Department of Labor's (DOL) current job outlook, which extrapolates the recent past and estimates that oil and gas extraction industry employment will fall by 28% between 2002 and 2012, with domestic employment contracting from 123,000 jobs to roughly 89,000 positions in 2012. "Can you blame a petroleum engineer who graduated in the mid-1980s, bruised and battered over the years by layoffs and endless job searches, from dissuading his children from entering the oil patch now despite the current good times?" Aliza Fan, co-author of the Herold study asked.

"We disagree with the DOL and see extremely strong growth prospects in the years ahead for oil and gas personnel in all facets of the industry, from the wellhead to the executive suite."

The report recognized oil companies' need to streamline operations and reduce overhead, as well as the ability of technological advances in drilling, completion techniques and specialized outsourcing to increase productivity and reduce the need for full-time manpower.

The data indicate a key measure of oil company productivity, EBITDA (earnings before interest, taxes, depreciation and amortization) per employee, has increased at a 10.6% compound average annual rate among the top companies since 1994. During that period, ExxonMobil's EBITDA/employee grew at a 12.3% compound rate over the past 10 years, reaching $444,000 per employee in 2004.

Oxy (25% 10-yr growth to $812,000/employee) and Total (16.5% to $266,000) posted high growth rates over the period, having started from a lower base. Profitability productivity leaders in 2004 were large North American independents Burlington Resources, at almost $1.9 million in EBITDA/employee, and Anadarko, registering more than $1.3 million/employee.

Alongside discouraging trend indicators such as general enrollment declines in geology, geophysics, and petroleum engineering of 26% since 1999 and 44% since 1986 at the Colorado School of Mines, the report unearthed a few encouraging signals of a nascent turnaround:
•Royal Dutch/Shell's January announcement of an intention to hire more than 1,000 petroleum engineers to reinforce exploration and production operations
•An American Association of Petroleum Geologists survey showing that entry-level geologists earn an average of $65,600 per year, a 24% increase since 1999 compared with an average 10% rise among all experience levels
•US Bureau of Labor Statistics data indicating average wage and salary earnings in the oil and gas extraction industry are higher than other industries, with workers paid an average of $19.27/hr in 2002 compared with $14.95/hr in other industries
•Expansion of the Texas Tech Energy Commerce program from 12 students in 2003 to 60 this year; plans by the University of Houston, funded with a new $40 million grant from the former chairman of AIM Investments, to expand its energy curricula and teaching staff; initiatives at Duke, Stanford, and among industry trade organizations to improve the industry's appeal to kindergarten to high school students, in addition to University undergraduate and graduate students.

4/19/05